Google’s Defense

As Jeff Horwitz notes in the Washington Post this morning (”Google Says It’s Actually Quite Small“, previously posted on Slate), the search giant will likely face close scrutiny from the Obama administration. Indeed, Google (GOOG) is already the subject of at least three separate antitrust reviews.

How will Google try to defend itself?

As Horwitz reports, Google will undoubtedly employ two classic defenses:

To overcome that argument, antitrust authorities (or private plaintiffs) will need to identify some specific actions that Google has taken to “restrain trade”, gaining market share by interfering with competition, rather than by demonstrating superior skill etc.

Google will then reply with:

Defense 2. Furthermore, we aren’t a monopolist. To identify a monopolist, you first have to identify a market. That sounds simple, but it actually inspires lots of debate in antitrust cases (and, in the process, enriches a certain cadre of economists who specialize in such issues). As Horwitz notes, commentators usually characterize Google as enjoying 70% or more of the revenue in the search advertising business, which certainly sounds like a big share. But Google thinks that market definition is too narrow. If you look at all advertising, for example, Google’s share is microscopic, less then 3%. Thus, Google will argue, it isn’t even a monopolist. (The truth is somewhere in the middle. Banner ads certainly compete with search ads, and thus may fall in the same market. But billboards?)

What happens if those two arguments aren’t sufficient to deflect further antitrust scrutiny? Well, Google has at least one more arrow in its quiver — an arrow that got stronger with this week’s launch of Bing, the new search engine from Microsoft (MSFT):

Defense 3. Our business constantly faces new competition. Even if we are a monopolist right now (which we’re not), there’s no guarantee that will last. This argument emphasizes the dynamic nature of competition. If new firms can enter the market — and, in fact, are entering the market — then any monopoly power may be transient. Faced with new competitors, leading firms must continue to innovate if they want to stay at the top of the market. In short, pressure from new competitors may prevent a dominant firm from exploiting any temporary market power.

The lawyers at Google probably welcomed Bing’s arrival, because it makes this line of argument much more plausible. Other new competitors — anyone remember Cuil? – haven’t posed much of a threat to Google, but Bing may be different. So may Wolfram Alpha, which provides a really different approach to search.

If antitrust scrutiny heats up, you should expect to hear Google extolling the virtues of both those competitors.

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including:
* Member of the President’s Council of Economic Advisers (CEA)
* Acting Director of the Congressional Budget Office (CBO)
* Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.